"Only Potential Buyer"

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Analysts believe Yahoo's next CEO must be willing to merge the search firm with Microsoft.

Microsoft offered to buy Yahoo for $44.6 billion on January 31, which Yahoo rejected. It sweetened its cash-and-stock bid to $47.5 billion, but withdrew it after talks fell apart on price.

Microsoft later came back with a proposal to buy Yahoo's search assets, but Yahoo turned it down as well, choosing to team up with archrival Google instead.

Yahoo and Time Warner also began talking about a deal under which Yahoo would fold AOL's online content and advertising assets into its operations, with Time Warner taking a stake in the combined company, sources have said.

Despite advanced talks, a deal hasn't happened because of challenges to valuing the businesses given the weak advertising market and Yahoo's falling stock price, as well as concerns over integrating the platforms, the sources have said.

Analysts have been skeptical about such a deal because they don't believe it would dramatically improve Yahoo's earnings.

"Yahoo-AOL? What would that bring to the table? There's no point in having a marriage of convenience. It's not going to last," said Mukul Krishna, global digital media director at Frost & Sullivan, a research and consulting firm.

Krishna said Yahoo's shareholders are looking for something more tangible to offset the stock's losses.

Yahoo needs either a substantial turnaround plan, complete with cost-cutting and a "roadmap to profitability," or an acquisition by Microsoft to satisfy investors, Krishna said.

"Microsoft will be only too happy to restart the conversation, but it will be calling the shots," he said.

Icahn, a major Yahoo shareholder, has publicly reiterated hopes of a Yahoo-Microsoft deal several times. He did not return calls seeking comment.

Analysts said they expect Microsoft to eventually come back because it needs Yahoo nearly as much as Yahoo needs it.

"Microsoft wants Yahoo's search audience, the traffic, the clicks," Needham's May said. "They want to have as much as Google does. So it's important for Microsoft to have a big presence in search and display."

But Cowen & Co analyst Jim Friedland said Microsoft is unlikely to want to rush into talks with Yahoo even with a new CEO knocking on its door.

Both companies are seeing declines in their Web businesses due to the global economic downturn, and as Yahoo's "only potential buyer," Microsoft can take its time, he said.